70TH YEAR OF STATISTICS OF INCE

David Paris and Keith Gilmour Internal Revenue Service

Since enactment of the moiern income tax inReports were to be made annually by the

1913 statistics based on information reported Comissioner of Internal Revenue with the

on Federal tax returns filed by U.S individual approval of the Secretary of the Treasury

taxpayers have been made available to the The initial volume of the annual Statistics

public These detailed income and tax statis of Income SOI series contained detailed data

tics have been published since 1916 as annual for Income Year 1916 as well as the few

Statistics of Income SOI reports Althoughstatistics for 19131915 shown in Figure

the focus of this paper is on the individual

income tax return program rnjch of the material Figure A.Returns Income and Tax 19131915

is relevant to the development of other SOl ________________________________________________

programs as well Number Net Income

Organizationally the paper is divided intoIncome of Income Tax

eight parts The first part provides surrmaryYear Returns millions millions

of the beginnings and the history of as

seen in the development of one if its principal1913 357598 $3900 $28

programs The next part covers major law1914 357515 $4000 $41

changes affecting the scope of the Federal 1915 336652 $4600 $68

individual income tax and its revenue yieldSections to highlight statistics which show

the tremendous growth in return filings the During the early years of the Statistics of

change in the amount and composition of income Income the individual income tax tabulations

and the historical pattern of the average tax were few in rumber and relatively uncomplicated

rate The two sections which follow examine Until the late 1920s the individual income

changes in statistical data sourcesstatistics particularly emphasized the tax the

methodology and processing Finally there issize of income producing the tax and where the

brief look at the new directions envisioned returns were filed major portion of each

for the processing of and the productsbook related to geography Not only were there

generated from the S0I ProgramsState tables showing number of returns incomeand tax classified by size of income but the

BACKGROUND AND HISTORY number of returns for each county city and

town were available for 21 years

After an 18year lapse in Federal income As runerous Congressional Federal State and

taxation the Sixteenth Amendment to the private economic research organizations were

Constitution became effective on February 25 created and as the needs of tax aQiiinistrators

1913 This amendment provided that and the estimators of future tax revenue grew

.Congress shall have the power to req.jests were received for new data showing

lay and collect tax on incomes from many detailed characteristics of the income of

whatever sources derived without all persons in the United States Consequently

apportionment among the several by the early 1930s the Statistics of Income

States and without regard to anyhad developed gradually into leading source

census or enumeration of basic economic data For example in

ortly thereafter on October the Income response to need for more detailed income

Tax Act of 1913 was enacted and imposed tax statistics not only for use in tax research

retroactive to March 13 on the income of bothbut also as benchmarks for Cmnerce National

individuals and corporations The only data Income and Products Accounts two voluminous

for the period March to December 1913 show that studies were conducted principally for the

there were fewer than 400000 tax returns filed years 1934 and 1936 These studies were

which met the $3000 minimum income filing produced under the direction of the Treasurys

requirement The income tax for 1913 amounted Division of Tax Research the predecessor of

to about $28 million In its first full yearthe Office of Tax Analysis and financed by the

of operation income tax rose only to $41 Works Progress Aäninistration WPA These

milliona far cry from the 1982 income tax manually compiled handwritten tabulations

before credits figure of $284 billion featured extensive individual and corporate

On September 1916 Congress enacted the data by income size and geographic area The

Revenue Act of 1916 which in addition to worksheets were recently converted to microfilm

various tax measures provided for for east of accessability by researchers The

the preparation and publication design of these tabulations became the protoof statistics reasonably available type of tables which were presented annually or

with respect to the operation of the periodically in the reports during the 1950s

income tax law and containing cThssi- and 1960sfications of taxpayers and of income By Income Year 1946 the JI reports had

and any other facts deemed parti increased to fourteen basic tables largely

nent and valuable through the introduction of crosstabulations

added to indicate how the program New data added along the way covered such items

name may have arisen as detailed sources of income including gain

79

from sales of capital assets standard and changes also occurred Sorie of these changes

itemized cductions incled types of itemized were elimination of llection of taxes at the

deductions nunter of exemptions and tax source 1916 credit for dependents and

payments New classifiers included size ofdeduction for charitable contributions 1917

specific income sources and net income and adoption of preferential tax rates on

The introduction of computers in Statistics lonQ..tellfl capital gains and introduction of the

of Income processing in 1954 was perhaps the gross incoe filing requirennts 1921 In

most significant technological change in its addition in 1939 for the first time all

70year history The tremendous increase in revenue laws were incorporated into single

the volume of returns statistically processed body which came to be known as the Internal

even with sampling coupled with the Revenue Code

increased complexity of the tabulations had In the early 1940s revisions to the law

caused the issuance of the reports to be occurred when the individual income tax was

greatly delayed in the 1940s For example broadened to cover most of the working popu

the 1949 Individual report was released in lation During the 1960s and throughout the

1954 While not the sole reason the use of 1970s there were several tax law changes

computers contributed importantly to the affecting individuals which in addition to

reduction in the publication gap the 1959 revenue cbjectives reflected concern with

Individual report was released in 1961 social objectives

In more recent years the SJI reports have The beginning of the decade of the 1980s

shown further increase in the number of basic again shows an emphasis on revenue objectives

tables For instance added detail is shown For example there were series of tax cuts

for number of returns filed sources of income introduced by the Economic Recovery Tax Act of

marital status and taxable and nontaxable 1981 the thrust of these however was to

returns There is more information for types lessen the individual tax burden rather than

of dependents types of tax computation and for to increase it

several types of tax credits Examples of

items more recently added are statutoryMJPER OF RETURNS

adjustments to income and minimum tax New

classifiers include taxpayers age 65 and over As shown in Figure the number of returns

marginal tax rates and alternative income filed prior to 1940 ranged from approximately

concepts data for which are specifically 300 thousand to million However with the

required by Congress Data from tax return introduction of lower income filing req.Jire

schedules are also being tabulated These data ments for 1940 the number of returns filed

include income averaging tax preferences doubled to more than 14.7 million By 1946 the

residential energy investments and energy number of returns had reached more than 50

investment credit million and by 1950 the number was slightly

Today individual income tax return data as more than 53 million During each of the

well as other tax return statistics produced as decades of the 1950s and 1960s the number

part of Statistics of Income program serve increased by an average of approximately 10

as keystones to economic analysis for both the million returns For Tax Year 1973 the runber

public and the private sectors Among the of returns passed 80 million and rose to over

users of SOl are the Treasury Departments 93 million for the first time for 1980Office of Tax Analysis the Joint Coiunittee on

Taxation of the U.S Congress the Bureau of

the Census and Bureau of Economic Analysis

both in the Department of Coiamerce private

nonprofit research organizations umiversitiesFt

well as many State and local Nrnbsr of Individual R.turns 19131982

In the future as more and more researchers

have access to computers of their own man ofMillions

gen ra increase demands for additional 1913 1950 1960 1970 1980

revenues to finance World War World War IIand the Korean conflict caused rapid and

numerous changes in the tax law The mostJt1948 nurber of

retjrnffiedpassed

the5Omon evel

drastic revisions occurred in the early 1940s 1981 number of returnsfiledreachedaall

time hIgh 01953 mutton

however prior to 1940 many inportant tax law __________________________________________

80

For Income Year 1982 estimates for the

nunber of returns filed showed only very ngure

slight decline to 95.3 million from the Numb.r of Ex.mptlons Oth.r Thin Ag and Blindns$s

alltime high of 95.4 million reached forClaim.d on individuil Tax R.turns vs U.S Population

1981.15 The current level of return filings

is more than twice the runber of returns filedThousands

for 1943 which was the first year of the NO.OE5PUOflS

current system of income tax withholding onu.SPopalaIion

wages and salaries200000f_

Over the 70year history of the modern 175000F

individual income tax the proportion of returns

with income tax before credits has also changed

see Figure Prior to the broadening of the JJJIindividual income tax base in the early 1940s 100.O00

the percent of taxable returns ranged from

high of aroximately 83 percent for 1916 to 60oooL

low of about 44 percent during the depths of

the Great Depression year 1934

1918 1933 1939 1946 1982

Selected Years

FIgure1918 About 10% of the population Coeered by tan returns

Taxabis R.turns Psrcsnt of All R.turna PU.d1933 Because of the Great DepressIon the percentage dropped to approxImately 7%

191 8i 9821939 Population covered bY returns grows to slightly more than the 1918 level

1948 BroadenIng of the tan base caused the percentage to Increase dramatically to

almost 87%

percent

1982 Approsimnately 90% of the population Is now covered

-- ---------

t943

90remained relatively low until the broadening in

1969 the coverage of individuals having to file

returns that occurred in the early 1940s By

55 1946 more than 87 percent of the population

was covered In the 1950s the percentage

grew still further then stabilized at where it

stands todayat approximately 90 percent of

the population It is because of this

widespread representation of the U.S60 population on individual tax returns that the

idea of using tax records has surfaced as

possible viable alternative to the traditionalhO ways of conducting the decennial population

census

401934 TREDS IN INDIVIDURL IMXIaIE

Since 1944 the Statistics of Income reports30- have presented yearly ta centered around the

concept of adjusted gross incomepositivesources of income less negative amounts and

.1916 20 25 30 35 40 45 50 55 60 85 70 75 8082 statutory adjustments Prior to then theYea statistics centered around the concept of net

incomepositive sources of income less

negative amounts and allowable deductions

During World War II the highest percentagesBecause of this conceptual difference it is

of taxable returns ever recorded were experi difficult but not inpossible to make any

enced when for both 1943 and 1944 more thandirect and meaningful longrun income

percent of all individual returns filed werecoirparisons However for the entire 70year

taxable In more recent years for 1968 andperiod of the individual income tax concept

1969 the percentages climbed to the secondof total incomepositive sources less

highest levels ever experienced83 and 84 negative amounts as provided for under the tax

percent respectively Estimates for Incomelaw for the particular yearcan be constructed

Year 1982 show the percent of taxable returns Table shows for the period 19131982

remaining about the same as for 1981atthe estimated total income as well as the five

approximately 80 percent components which have historically accounted

The percent of the total U.S populationfor the majority of the total

represented on tax returns is illustrated in As expected the total income reported in

Figure This percent has increased quite current dllars on all individual returns has

dramatically over time For instance for 1918 grown dramatically during this century from

approximately 10 percent of the population was about $20 billion for 1919 to almost $2

represented by taxpayer or dependent on an trillion for 1982 During the Depressionindividual income tax return The percent however there was long period when total

81

income declined For example for 1928 the4- 4- FiguTeE

income repor.eu on rewrns wasCurrsit and Constant Dollar Total Incom 19291939

approximately $27.3 billion During Income 1001

Year 1929 the nation experienced the stock

market crash and huge losses of $1.8 billion Miiiiopfiia4

associated with the sale of real estate constantS.

stocks and bonds were reported For that year 80

total income dropped to $26.6 billion and

continued on downward trend as the Great

Depression progressed to low point of $10.6 70

billion for 1932 During the rest of the

Depression total income reported grew rather 80slowly and only by 1939 did it again surpass

$25 billion

Because of the dranatic increase in the

nujigjer of returns filed during the 1940s by

1945 the total income had increased to $120

billion Over the next fifteen years total 40

income grew steadily and reached more than $31635

billion for 1960 During the decade of the

1960s total income doubled again and with

the rapid inflation of the 1970s and early25

Current$

1980s it grew even more to over three times

the level of the late 1960s .20

Changes in Real Total Income

Presented below in Figure for selected

years is the total income in constant dollars i1adjusted for inflation compared to the 192 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939

current dollar total for the same year

Figure -Total Income for Selected Years Furthermore for the 11year period of 1929 to

19291982 1939 there was 12 percent real growth in

________________________________________________ total income in contrast to very small

Total Income decline in the current dollar totalSelected Current Constant 1972 Generally growth in real total income

Income Dollars Dollars reported on individual income tax returns has

Year millions millions continued at steady pace over the years since

1940 see Figure G-i However unlike the

1929 26.7 61.1 current dollar total for each year which over

1930 17.0 38.0 the last 43 years has experienced only one

1935 12.2 38.6 downturn from the previous year 1949 the

1940 40.2 130.0 pattern of change in the constantdollar total

1945 120.0 272.1 income has generally coincided with the

1950 179.1 314.9 expansion and contraction of the U.S economy

1955 249.0 386.7 For each of the nine tine periods highlighted

1960 316.1 439.7 in Figure C-i the u.s economy experienced1965 432.3 560.0 the end of business cycle expansion the

1970 639.4 691.2 beginning and ending of recession and ttie

1975 962.9 769.1 beginning of new period of growth As1980 1642.3 916.5 shown during each of the periods the growth in

1981 1804.0 927.5 real total income reported on individual1982 1917.0 930.6 returns was flat or in decline This pattern

____________________________________________ of change in real total income was especially

prevalent in the 10year period ending with

1982 during which time the economy experiencedAn exanination of the data shows that the three economic downturns in 19731975 1980

15fold real growth in total income over these and l981l982..see Figure G-254 years is consistent with but less staggerin9 During the recession of 19731975 real total

than the 72fold growth rate in the current income dropped by 0.3 percent for 1974 and .by

dollar total As seen in Figure the 2.6 percent for 1975 and in the recession of

constantdollar total income in the Great 1980 total income dropped slightly 0.1

Depression of the 1930s declined in the same peroent from the 1979 total For the most

pattern as currentdollar total income and recent recessionary period of 19811982 there

reached low point of $38.2 billion for 1932 was very slow growth rate of only tout 1.2

However unlike the currentdollar totals real percent for 1981 and about 0.2 percent for

growth in total income was more rapid because 1982 However despite this slow growth real

of falling prices By Income Year 1937 the total income reported on individual income tax

constant dollar total had passed the returns reached an alltime high for Income

preDepression level of $74.3 billion Year 1982

82

Figure 01Currsnt and Con.tant Dollar Total lflcom 194019821972 100

Current

Millions of Dollars

1969-1970 Constant

1957-1958 1960 1961

400

1945.\

1973-1975

200

Constant

100

96

00

40Current

20

194041 42 43 4419454047 48 49195051 52 53 5419565557 58 59190001 02 03 8410656807 0808191071 72 73 741915101778 7819608102

Veer

Figure 02 Real Total Income 19731975 and sharp consistent proportional decline from

19791982 almost 42 percent of the total for 1916 to less

____________________________________________than percent for 1982 This change in the

Real Total Percent composition of individual income over the years

Year Income Change fran is shown in Figure

thousands Previous Year

INCOIE TAX JD AVERAGE TAX RATE

1973 792630 4.9

1974 789881 0.3 The Statistics of Income reports have

1975 769078 2.6 presented yearly statistics dating back to 1913

on income tax before credits as defined under

1979 917038 3.2 the tax law for the particular year As

1980 916495 0.1 shown in Table in general during the first

1981 927533 1.2 23 years 19131940 the total income tax

1982 930599 0.2 tefore credits shown on the returns tabulated

in SQl fluctuated because of the effect tax

law changes and economic events had on totalincome between approximately $28 million and

jrSources of Individual Income $1.3 billion

However beginning with the growth of

Historically the most important sources of individual incorre in the 1940s total income

income reported an individual returns have been tax before credits rose almost steadilysalaries and wages interest dividends peaking for 1981 at more than $290 billion

business income from sole proprietorships and For 1982 total income tax before credits

partnerships and gains from the sale of capital dropped by approximately $6.3 billion largely

assets For most of the 70year period these reflecting the tax cutting provisions of the

five sources of income have accounted for more Economic Recovery Tax Act of 1981than 90 percent of the total individual income Along with the historical increase in total

reported for tax purposes However during income tax before credits there was also steady

this period there was significant change in increase over the past 70 years in the averagethe composition of income Over the years inW.vidual income tax rate see Figure

salaries and wages accoirited for the largest The many different economic events and tax

single source of income Since 1918 they law changes which affected both the definition

represented more than 40 percent of the total of income reported on tax return and the

Interest income which was once the smallest of calculation of tax before credits on this

these five major sources increased rapidly income have naturally caused the rate to

Since 1967 it exceeded dividend income as the fluctuate between less than 1.0 percent for

second largest source Furthermore reflecting 1913 and 16.0 percent the alltime high for

an overall change in the form of business 1981 However since the midl960s the effect

arrangements from unincorporated to of inflation or bracket creep was an

incorporated business income mostly from important economic event which caused the

partnerships and sole proprietorships showed average rate to increase

83

Table 1.Number of Returns Major Sources of Income and Income Tax 19131982

i4umbers of returns are in thousands money amounts are in millions

Maj or sources of incometax

Number of Total Tutal tax

rnDi Id nd

lit itme

All th ditii bility

an wages less less lossscone

10

193 358 3900 n.m n.m n.m n.m n.m n.m 28 28

1914 358 4000 n.m na no n.m no n.m 41 41

1915 337 4.600 n.m n.m n.m n.m n.m n.e 68 b8

1916 437 6.299 1.851 667 2.136 N/A 2.637 992 173 173

1917 3473 13652 3.648 936 2.849 N/A 3640 2.579 795 795

1918 4.425 15.92 8.267 1.403 2469 N/A 4339 553 1.128 1.128

199 5.333 19.859 10756 1.500 2.454 N/A 5.709 560 1270 1.270

1920 7.260 23.736 15.323 1.709 2.736 N/A 4.922 954 1.075 1.075

1921 6.662 19.577 13.813 1.690 2.477 462 3707 2572 719 719

1922 6.787 21.761 13.694 1.738 2664 742 4.267 1.344 861 861

1923 7.698 25313 14193 2.183 3.120 866 6.399 1.448 662 662

1924 7370 26189 13618 2281 3251 1.124 6.565 650 735 704

1925 4171 22.337 9.742 1814 3.465 940 5.516 860 759 735

1926 4.138 22442 9994 1.936 4.012 1.287 5.306 93 757 732

1927 4.102 23054 10.218 2.026 4.255 1.585 5.043 727 856 830

1928 4.144 27338 10945 2.143 4.440 1.708 5.223 2879 1.199 1.164

1929 4.133 26692 11373 2.210 5.081 1.341 5.282 1.40 1.024 1.002

1930 3852 17.047 10.206 1.940 4.632 676 3.101 3.508 502 477

1931 3.411 12.221 8631 1.337 3600 990 2.016 4353 264 246

1932 4.083 10.671 8.356 1.307 2.189 325 1229 2.735 330 330

1933 3.892 11.473 7.565 1.106 1.711 232 1.746 887 374 374

1934 4.198 14957 8.681 995 2.041 18 2125 1.097 511 511

1935 4670 17.193 9.972 980 2.288 363 2.387 1203 657 657

1936 5.486 21773 11.718 955 3.228 852 3.210 1810 1.214 1.214

1937 6.350 24120 14.206 86 3.248 18 3.359 2.293 1.142 1.142

1938 6.251 21.436 13307 823 2.212 176 3.120 2.150 766 766

1939 7.652 25363 16.491 832 2.544 321 3.674 1.501 929 929

1940 14711 40.15 27.707 1.003 2.999 332 5.407 2.707 1.496 1.496

1941 25.870 63433 47.140 1.029 3.299 430 8.45 3.080 3.908 39081942 36.619 85.780 65.617 982 2833 112 12.833 3.403 8.927 8.927

1943 43.722 106.555 82.755 886 2.780 59 15.717 3.822 14.590 14.590

1944 47111 116.465 91.125 3.924 917 17.250 3.249 16.224 16.216

1945 49932 120009 91.700 3.925 2.114 19.003 3.267 17.061 17.001946 52.817 134.083 99.174 1067 3674 3.068 23267 3.833 16091 16.076

1947 55.099 149736 114804 1.125 4.295 2.154 23.29 4.063 18092 18.076

1948 52.072 163.516 125.881 1.293 4.971 2.201 24.506 4.664 15.442 15.442

1949 51.814 160.574 124.883 1528 5.246 1.604 21.705 5.608 14.538 14.538

1950 53060 179148 139073 159 6.157 2.927 23.429 5.967 18.375 18.375

1951 55447 202.337 160.482 1.702 6056 2.997 24.878 6.222 24.439 24.439

1952 56.529 215.290 174339 1847 5.860 2.470 24.754 6.020 27.822 28020193 57.838 228708 187.734 2.043 5.828 2.075 24.951 6.077 29.40 29.657

1954 56747 229.573 185.953 2.370 7.048 3352 25.452 5.398 26.873 26.967

1955 58.20 248.974 200.712 2.584 7.851 4.751 27.454 5.622 29.982 30.077

1956 59.197 268268 215618 2.872 8.606 4.53 30.137 6482 33.134 33.265

1957 59.825 280.895 228.077 3.319 9.124 3.485 29.698 7.192 34.816 34971958 59085 281.777 227.51 3.659 9.741 4.330 29.906 6.590 34755 34.925

1959 60.271 305.772 247.370 4395 9.356 6.275 30.994 12.382 39.09 393471960 61.028 316141 257.918 5.057 9.530 5.300 30.038 8.298 39.909 40.298

1961 61.499 330.617 266.902 5.683 9.890 7.621 31.578 8.943 42714 43.066

1962 62.712 349.484 283373 7155 10.640 5771 33.269 9.276 45.691 45.790

1963 63.943 369.675 299.443 9212 11.452 6.449 33.184 9935 49.117 49.216

1964 65376 399539 323.266 10.125 11917 7939 35.358 10.934 47.896 481851965 67596 432344 347150 11.296 12.961 10180 38.559 12.198 50144 506321966 70.160 472132 381.067 13.225 13998 9941 40.984 12.917 56.773 51.627

1967 71651 509.151 411646 14.899 14.202 13.682 42.280 12.442 63655 64.525

1968 73729 559.760 451.505 16782 15.222 17990 45503 12758 77.440 78.419

1969 75834 603546 498.865 19626 15.740 14.583 45.842 8890 87.336 88.524

1970 74.280 639358 531.884 22021 15.807 9.007 44242 16.397 84156 85767

1971 74576 682467 564967 24731 15.671 13.155 45029 18.914 85.942 87.469

1972 77573 755.540 622599 27.400 16.794 17.076 49616 22055 94.442 954491973 80.693 837.813 687179 32.174 18734 16.672 56.489 26.565 109.394 111.175

1974 83340 918626 758628 39543 20.807 13.470 5505 31.043 125.079 127.003

1975 82229 962887 795399 43434 21.892 14.072 53.736 34354 127.432 127.939

1976 84670 1070180 880.998 48588 24.461 18.962 59.637 37934 144.186 145.749

1977 86.635 1.177821 969.403 54603 27.020 20.777 63271 42.747 162.587 164.024

1978 89.772 1324811 1.090.292 61223 30206 23.231 75.156 44.703 193555 193.185

1979 92.694 1.490173 1229.251 73.875 33.483 28448 69013 56103 220.099 220.100

1980 93902 1642.345 1349843 102009 36.761 29.660 64.557 59515 256.294 2562511981 95.396 1804.046 1486.100 140559 48.161 30.819 52933 45474 290.207 291.127

1982 95337 1917.023 1560995 157.021 52.142 34.404 49.66 58.796 283.932 284.708

Salaries and wages reported cc individual returns Include Profenoions and vocations for 1916 the tanpayers earned income rum partnershipn for 19161926 and earned incone

of the individual spouse or depeodent minors derived iron business conducted on sole proprietorship prior to 1924 For 19441960 they exclude amounts of loss than $100 per

return reported on Form w2 from which no tax wan withheld such wagon and salaries are tabulated on other income

Because of tao law changes the amounts shown for interest received may not he comparabl for each year Foe specific ye ar see the applitahie SOtreport for those asnuntn of

interest received which wore required to be reported on individual tao returns The 1981 data are for dividends received before euclusion Sen footnote fur farther information

Becauseuf too law changes the amountu shuwn for dividend income may not be comparable for each year For specific year see the applicable SOS report for thnse amounts of

dividend income ahich were required to he reported no individual tan returns Amounts shewe for 19541982 are for dividends after the euclusino amount The 1981 data are for

dividends hoforeecclusion Sue footnote for further information

t8ecaase of tan law changes the amounts shows for net capital gain lens ions may not be comparable for each year For specific year see the appltcahle iOI report fur these

amounts of oct capital gain lens less which ere required to he reported on individual tan ceturnu

Sousiness uct income lenu loss iucludes income from sole proprietorohipu and partnerships Because of tao law changes the amounts of business income from sole proprieturshipu

and partnerships say uct be comparable for each year See footnote above for further iofurmatiou on sole proprietorship and partnership income included as salaries aod wages

for 19161926 See the applicable SOt report for those amounts ef sole pruprietoeship und partnership income which were required to he reported on individual tan returns

5The total uoouut for in000e tan before credits fur few yearsdiffers nilghtly tram the tutml shuwn in the apprnprimte SOS repurt This differenre is the result uf slight

aduncnentsmade for certain general tan credits shich were added in the tan law to luwer tan liability without chauging the tan rates

Total tan liability iucluden all income tomes reported on individual emturns

Fur 1944 and 1945 the total amounts for interest and dividend incume were combined in the 505 reports nod shoun as dividend income

gecause of onetime combined iotereut and dividend exelunion iv 1981 data fnr interent and dividends are bet ore exclusion The rembined amount of interent mmd dividends

after the evclusicn was $l78097705000 reported on 31144415 returns

NOTt Detail nay nut add to total because of roendieg

84

Ficiure Figure

Average Individual Income Tax Rate 1913-1982

Major Sources of Individual Percent

Income Percent of Total 17.5F

1916 1943 and 1982

Interest

1930

Dividends

258%

223% 1913 20 1930 1940 1950 1960 1970 1980

t..i. .i 1925 1935 1945 1955 1965 1975

//// Year1N Itztf

BusinessOther

1930-Beginning of the Great Depression

31.8%12.0% 1943First year of tax withholding trom wages and salaries

1969Vietnam War tax surcharge

1981Economic Recovery Tax Act

1943

$106 Billion_______

taxpayers for each of the years 1975 through1978 and the 1.25 percent rate reduction credit

Other for 1981 which was the first of several tax

3.8% Capital cuts introduced by the Economic Recovery Tax

Gauns Act of 1981 The drop in the rate to 14

08% percent for 1982 reflects the first full yearDividends of the taxcutting provisions of the Act

Salaries 6%Wages ...... DATA St1JRCES

Itne0es Throughout the history of the Statistics of

Income data series for individuals the data forthe most part have been based on stratified

probability samples of unaudited individualincome tax returns The use of systematic

1982stratified sampling was introduced as early as

911 Bullthe 1925 Statistics ol Income report Its

Business use is indicated in this portion of the text

Other 2.8% excerpted from the 1925 volume

3.5% Capital Gains

1.7% .In addition fair average

Salaries Dividendssample of the returns filed by

Wages 7% persons having net income of less

81 4% than $5000 approximating 250000Interest returns are sent in to the Bureau by

81% the 64 collectors offices and are

analyzed for information bearing on

this income class the data fairly

representing the distribution of

income of all the returns filed

having net income of less than

$5000

This phenomenon of bracket creep was caused This was so far as is Iqown one of the first

by the fact that under the U.S graduated uses of stratified sampling in major Federal

system of taxation income increases intended statistical progrnto compensate workers for rising living costs The largest rumber of returns included in the

pushed taxpayers into higher tax brackets with soi sample for any one year was 1.1 million for

the result of both larger total and average tax 1948 Today with the mix of sophisticated

burdens for individuals This continued automatic data processing better statistical

increase in the average tax rate occurred techniques and recent budgetary constraints

despite several tax lowering measures such as the size of the sample has fallen to around

the general tax credit which was given to 100000 returns

85

The aggregate nunber of returns and money introduced for regular IRS processing heamounts shown in the early Statistics of Income example which should impact significantly on

reports are uidoubtedly different from those 501 processing costs and timeliness is the use

that were actually reported on all individual of online error resolution in real time

income tax returns filed These reports did environment This replaces the traditional

not contain data from deficit returns deduc laborious afterthefact checking procedurestions exceeded gross income because the which were often done without the source docu

emphasis of Statistics of Income was on net ments on handincome and whether the returns were taxable or In the area of statistical products it is

nontaxable exemptions exceeded net income expected that the focus of the SOl ProgramsData from all individuals returns filed were will move away from the more traditional annualnot includeTh SOl until 1928 and supplemental reports to broader concept

In addition prior to 1937 the income of an of user services taking advantage of less

estate or trust which yielded tax for which complicated more efficient hardware coupledthe estate or trust was liable usually income with the ever increasing variety of statistical

received while the estate was being settled or softwareincome from trust which was not yet

distributed to beneficiaries was required to AONOWLEDQvIENTS

be filed on an individual return Form 1040The tax rates were the same as for individuals This paper excerpts material which was

and separate Form 1041 was rot used for this gathered for the commemoration of the first 70

purpose until 1937 Consequently for years of the Statistics of Income SOl Program

19161936 data for individuals and estates and and which was later used as the basis for

trusts with net income were all coithined Statistics of Income Bulletin article entitled

though labelled as individual returns and w7Oth Year of Individual Income Tax Return

they were not separated in the statistics Data by David Paris and Cecelia Hilgert All

of the authors wish to express their

STATISTICAL PROCESSING OF ItOIVI0UAL appreciation to Clementine Brittain and Cathy

INCOtE TAX RETURNS Robinson for their efforts in the typing and

copy preparation of the material used for this

The processing of individual income tax paper

returns for statitical purposes has grown from

the laborious manual operation of the first NOTES AND REFERENCES

five decades to fully computerized system in

the 1980s In the context of this paper is is The American Way in Taxation Internal

worth noting some of the years in which these Revenue 18621963 ed Lillian i55Tprocedural changes were made Englewood Cliffs1.963

Electronic Accounting Machine EAM equipment Blacksin .Jack and Plowden Raywas used for SOl proccessing beginning as early Statistics of Income for Individuals

as the 1920s and in 1954 IRS working at Historical Perspective 1981 Americanthe Census Bureau first enployed computer Statistical Association Proceedingsfor their statistical work although basically Section on Survey_ Research Methods pponly for tabulations 581586

The concept of Master File transcribing See for the annual Statistics of Incometo tape most of the information supplied on the reports U.S Department of the treasurytax return was first applied to IRS processing Internal Revenue Service Statistics ofin the late 1950s and became operatonal pçprneIndividua1 Income Tax Returnsnationwise in the 1960s When the use of Publication 79 and Statistics of Incóiiautomatic data processing became operational in Corporation Income Tax Return Publication

all IRS regional service centers computer 16designation of the statistical samples Publicuse tape files available from the

commenced with the 1966 Tax Year individual Statistics of Income program includereturn SOI program Individual Tax Model for each year 1966 to

It was not until 1974 however that it was 1981 Corporation Source Book for eachconsidered practicable to use for statistical year 1965 to 1981 Estate Tax Returnspurposes data which had been recorded for 1972 and 1976 Private Foundations 1974Master File purposes Now almost 90 percent and 1979 Sole Proprietorships 1980 andof the data elements in the individual tax County Migration Data 19801981 Furtherreturn SOI program are obtained directly from details including ordering informationthe Master File with only the remaining 10 can be obtained by writing to Directorpercent separately edited Statistics of Income Division DRS

Internal Revenue Service 1111 ConstitutionNEW DIRECTIONS FR THE SOl PROGRAMS Avenue N.W Washington DC 20224

Preliminary Income Year 1983 estimates

The new directions envisioned for the SOl show that the nunber of returns being

Programs can be broadly categorized into two filed is up from the 1981 figure to 97.0

areas processing innovations and million and projections are for continued

product reshaping growthWith respect to processing the SOl Programs The nunber of exemptions claimed on tax

are utilizing as fast as practicable the returns gives count of the nuirber of

improved systems equipment and operations being individuals actually covered by the tax

86

filing system There are however some Bureaj of Economic Analysis The National

adjustments that have to be made to the Income and Product Accounts oFtDTtnurrer of exemptions to compensate for Sttes 9276 5epthæ5I 11iSurveyover and undercounting of individuals of Current Business July 1982These include subtraction of the extra U.S Departmenrf Commerce Bureau of

exemptions for age and blindness Economic Analysis Business Conditions

elimination of duplicate counting of Digest November 1983dependents with unearned income and For selected years 19231933 1943adjustments to compensate for overcounting 19751978 and 1981 the total amount forof certain deceased taxpayers dependents income tax before credits shown in this

with earned income and dependents of paper differs slightly from the totaldivorced tax return filers For more shown in the appropriate SQl report Thisinformation on comparability of Census difference is the result of the slightPopulation information with tax record adjustments made for certain general taxinformation see for example Alvey Wendy credits which were added to the tax law inand Scheuren Fritz Background for an order to lower tax liability withoutAdministrative Record Census 1982 changing the tax ratesAmerican Statistical Association Pro The average individual income tax rate is

defined as the ratio of total income to

general a1lowaEI deducEi1ncluded income tax before credits Income tax

but were not limited to such items as before credits is the focus in thisinterest paid taxes paid contributions article rather than income tax afterlosses from fires and storms and bad

credits because of the desire to look atdebts See the applicable SOl report for the impact of the differing rates overthose deductions allowable in specific time The general pattern shown in this

year article would however be little changed ifFor each Tax Year the total income figure the calculations had been made with income

computed for the year was derived from the tax after credits instead Total tax

data shown in the applicable SOl report liability as shown in Table includes

This was accomplished by adding the not only income tax after credits but also

positive amounts of income less the net additional tax for tax preferencesloss amounts of income The total amount selfemployment taxes etcof ret income shown in the SOl reports U.S Department of the Treasury Internal

prior to 1944 differs from the total Revenue Service Statistics of Incomeincome amount for the same years shown in 1925 pagethis article In the original SQl reports For further information on the 1982 sampleprior to 1944 allowable deductions were see U.S Department of the Treasurysubtracted from the total income in Internal Revenue Service Statistics of

arriving at ret income These deductions Incomel982 Individual Income Tax

are discussed in note above tjrns 1984In addition the total aiwunt of It is assured that the data in this paper

adjusted gross income AGI shown in theare impacted to negligible degree by the

SOl reports since 1944 also differs from absense of deficit returns prior to 1928the total inome amount shown in this and the presence of fiduciary returnsarticle In the reports since 1944

prior to 1937 The nuiiber of deficitstatutory adjustments were subtracted from returns filed for 1928 for example wastotal income in arriving at AGI Statutory only 1.8 percent of the total Fiduciaryadjustments include but are not limited

returns with net income for 1937

to such items as the mving expense represented about 1.2 percent of theadjustment employee business expenses and

corrbined nunber of individual andthe sick pay exclusion See the

fiduciary returns

applicable SQl report for those statutory Duncan Joseph and elton Williamadjustments allowable in specific year Revolution in Lkited States GovernmentThe adjustment used was the implicit price St1stics 19261976 U.S Department ofdeflator for personal consuiiption expendi Commerce Office of Federal Statisticaltures See U.S Department of Commerce Policy and Standards 1978

87